Monday, 31 August 2015

A pitch that funded on Crowdcube in 2011 has just published its 2014/15 accounts. That is at the end of its 3 year projections - the ones used to sell the equity.

We wont mention the name of this company as they are still trying hard to make progress and we wouldn't want to damage that.

The pitch 4 years ago showed a 3 year projection with turnover for 14/15 of £1.5m and net profit of £150k. This allowed the company to sell equity and show a handsome return for investors. It was all, as ever, sanctioned and due dildoed by the number crunchers at Crowdcube.

In reality the turnover for 14/15 was £120k and profits came to £11k. Roughly the same margins, so they should be applauded for that. This figure is 50% lower than the actual turnover declared by the company for 2010/11, as is the profit. However this 2010/11 'actual' posted in the Crowdcube pitch was in fact wrong according to the accounts filed at CH for that year. Hard to know what to believe.

It is just another example and by goodness there have been a plethora of them, of how Crowdcube allow pitches to publish completely laughable projections so that equity can be sold and a 'return' shown to be a 'reality'.

Sooner or later surely the magic that keeps the carpet flying must run out. It is almost unbelievable that it has not already. But then it is this belief that the next one will be the one, that keeps both The Lottery and Crowdcube going.

Wednesday, 26 August 2015

When asked about the various companies that have funded on Crowdcube and then gone bust, Luke Lang, CC's PRing man and co founder, has always glibly replied that there are bound to be some failures along the way - its collateral damage which is made worthwhile by the benefits.

We have brought various failures to the attention of our readers and the one very small success to date. One of the failures that is still in its final death throws illustrates just how very wrong Luke Lang's philosophy is.

Ovivo Mobile Communications Ltd raised over £500k on CC. One day shortly after raising this money, all the lines went dead. The company had folded and was put into liquidation.

That was a year ago and the liquidators annual report reveals the full extent of Crowdcube's collateral damage.

The company found no buyer and the assets, which were valued by the owner at £90,000 realised £4,000. Cash at bank was £80,000 and the liquidators bill to date is £41,000. So essentially the company will have nothing to distribute by the time it is closed - sometime next year.

Ignoring the large number of shareholders who believed the Crowdcube pitch, what else did Ovivo owe when it closed?

A lot is the answer. The liquidators report shows debts of just under £3,000,000.This includes £1,000,000 of customer credits but more alarmingly £650,000 of trade creditors.

Now Ovivo was only able to trade because Crowdcube presented their projections in such a way as to entice investment. Without the Crowdcube money, Ovivo would not have been allowed to build debts of almost £3m and leave over half a million pounds worth a trade creditors hanging out to dry. And all of this was done with the blessing of HMRC via EIS rebates.

So Mr Lang the next time someone asks you about the collateral damage you are causing, do try to have a proper answer ready.

Tuesday, 25 August 2015

The musical flopped on its first outing having raised what was then a record £1m on Crowdcube - although there was evidence that the platform had dressed the pitch up to make it look more tasty. The reviews are well worth reading if you like a laugh.

The company, Water Babies Music Ltd is still in liquidation and not yet closed. The most recent report from the liquidators shows zero assets with £120k due to creditors and over £1m lost by shareholders - many of whom had invested over £10k.

What we find odd about all of this is that you cant find this information anywhere - no news stories, no Crowdcube PRing as with the E Car Club sale. Nothing. Just silence.

We think that lacks a certain balance and a certain honesty.

Many Crowdcube 'successes' have now closed, losing investors and creditors in the region of £4m. One small success, made investors £1m and it is headline news.

9. Investors’ appetite for niche, complex businesses will grow.We’re already seeing companies from specialist sectors, which address highly complex business and social problems, successfully attracting investment through alternative finance. Biotech company Cell Therapy, for example, has just funded on Crowdcube – and this is the kind of business we didn’t expect to be approaching us four years ago. As the number of registered investors on crowdfunding platforms rises – we expect to have as many as 300,000 on Crowdcube by the end of 2015 – the understanding and range of interests of the investor base broadens and deepens, increasing the capacity for niche businesses to find their audience.10. Entrepreneurs will take the opportunity to make an exit.2015 will mark three to four years since the first crowdfunded businesses launched, and it’s likely that entrepreneurs will start taking the chance to exit, and the investors who backed them will get a return as they’re successfully sold. That is an incredibly exciting prospect.

Its from the Crowdcube Pring Dept's 10 predictions for 2015.

No.9 - Cell Therapy could be interesting. They were due to IPO this year but as with most businesses in this sector, timing is always fraught. However although the Crowdcube projections are the usual rubbish, the company is making progress and may yet come good.

It seems highly unlikely that the investor number will be even close to 300,000 - its currently at 198k. Of course this is now known as doing a Crowdcube. It helps to explain why all of their business plans contain projections you can half before they make sense.

No.10 - Wow! E car Club aside and this was a deal forced on shareholders who would have done far better to stay in, this prediction looks laughable for 2016 let alone this year. The missing ingredient is the simple fact that entrepreneurs dont sell businesses - buyers buy them. Where are the Crowdcube businesses anyone would want to buy? They dont exist on this planet.

Stakis Daycare Nurseries Ltd raised over £100k on Crowdcube in 2013. Their first accounts showed a £143k loss against projected profits (the usual Crowdcube pattern) and now this year they filed to close only to cancel it.

This is what the Stakis website says today(August 2015) when you click Our Centres -

Stakis Daycare Nurseries is currently negotiating for several key locations for its initial nurseries, expected to open in early 2014. Watch this space for further announcements.

We are still watching. We take that to mean that nearly 3 years after raising money on Crowdcube the business still has no operational nursery!

The list of failures is growing and yet people are still throwing money at this platform - how stupid can we be.

Monday, 24 August 2015

We have featured Front Up Retail here before. This company raised over £300k on Crowdcube in several tranches, then immediately went into administration, where it turned out Jon Allen, the founder, had done a pre packed deal with Lyle and Scott. This deal has left all shareholders and creditors with nothing but Allen with a full time job at L&S and payment of his business loan. The timings strongly suggest that the pre packed was an idea alive and kicking when Allen was allowed by Crowdcube to sell yet more equity - based as usual on totally fictitious projections.

That was a year ago on August 31. The administrators are still not done.

In their interim report, from April this year, they have revealed that they handed in a confidential report to the Secretary of State concerning this affair.

If there is any justice in the world, this report will highlight the timing of the final equity sale on Crowdcube and the pre packed deal. This should result in disqualification of the Director and may lead to further action from the shareholders. Caveat Emptor.

Sunday, 23 August 2015

Can we all please agree that using the discounted cash flow valuation model for start ups and early stage Co's is a complete nonsense.

So why do they do it?

To be fair they dont all do it, but a recent example gives us a clue as to why the more naive try it.

Mara Seaweed, featured here for its outstanding valuation and ridiculous net profit margins, has now declared that it used DCF - via their accountants calculator - to come up with £3.5m valuation. Apparently as the accountants made the calculation, it is sound.

Rule number one when using DCF is that the depth of histrical data should be sufficient to give confidence in the projected future cash flows. Clearly being a start up this data does not exist for Mara. Putting the wrong figures into a calculator generally results in a false reading.

Rule number two, is that the ratios used must be tried and tested. Mara has a net profit margin of around 35% when its 'valuation' is calculated - it hasnt achieved anything like this yet. There is no evidence from any market or from the company that this NPM is achievable at these turnover levels. It is a figure plucked from thin air or rather one worked backwards to allow a high valuation.Putting your own imaginary figures into a calculator will always produce your own answer.

There's the rub. This whole ludicrous process is being driven by the valuation - it is supposed to be the other way around.

Mara have shown already just how naive they are when it comes to business - see Dragons Den. They have refused to accept a single of the many sound arguments put forward on Crowdcube for a more realistic valuation. Now they have admitted to using a totally inappropriate calculation technique to endorse this valuation.

Our bet is they will lower the valuation in a week or so when they are still around £100k short; by which time any right minded person would have concluded that the whilst the product is of interest the management have some serious issues.

Friday, 21 August 2015

When companies claim that someone as important and influential has invested in their business, you should shut up, sit up and pay attention.

Sir Tom Hunter is probably Scotland's best known, modern day entrepreneur and through the Hunter Foundation, he has been doing great work helping to develop Scottish business.

Recently The Hunter Foundation took over the running of the Edge Fund. The Edge Fund was initially established by Scottish Enterprise, a government quango, to invest in start ups and early stage growth companies. Applicants pitch their businesses in a series of rounds to a panel of judges, who eventually decide as a quorum on who gets what. Prior to Hunter Foundation control, it had been rather over heavily influenced by the Entrepreneurial Spark incubator programme in that most of the awards had gone to ES participants.

Sir Tom Hunter is on the board of the Edge Fund. He is one of the judges.

However to claim that because the Edge Fund granted your business £50k, that Sir Tom Hunter is a direct investor in your business, is at best misleading. It is certainly wholly untrue. Such a claim was made very recently by Mara Seaweed, whose shambles of a crowdfunding campaign we have highlighted here before.

The claim went on that because he had invested, and Scottish Enterprise had also invested, that the business plan was sound. Hmmmm ........ the Edge Fund and SE invested in Log Six Systems Ltd a couple of years ago and that company and its Director are being investigated for fraud. At the time of the investment said Director was in fact a disqualified director. So much for their due diligence.

Monday, 17 August 2015

You would imagine that this is a start up help package - an incubator programme to get young first time entrepreneurs in the mix when it comes to raising finance.

Wrong.

Crowdcube's Sprint is like so much on the platform, merely a marketing ploy. It offers no real help to struggling entrepreneurs - in fact it boasts that you can get your pitch live in 14 days which is likely to be anything but a help. It is good enough to only charge the standard 5% success fee not the extra legal fees - which are in fact very small anyway.

Its promotion uses all the usual Crowdcube razzamatazz - mentioning big names who have raised on Crowdcube even though they didnt use Sprint.

It is lots of puff and no substance and that is why there are currently 8 Sprint pitches on the site out of a total of 23. Not one of these 8 looks likely to complete its fund raising. They represent some of the worst pitches the platform has ever seen.

This tells you all you need to know about Crowdcube's management and their Sprint Programme. Young entrepreneurs would be better standing still and coming up with inevestible plans than being fooled by Crowdcube's never ending marketing. Sprint's only achievement will be to set these crusaders back or put them off all together.

Saturday, 15 August 2015

We have a mound of evidence showing that you cannot believe the accounts and returns that are filed with CH for small businesses. These are the official accounts and returns that people like you use to judge an investment opportunity on platforms like Crowdcube.

This comes about because of the very lax systems we have in the UK. Small companies with turnovers of less than £6.5m are not required to audit accounts and they can present their own 'version' of their balance sheet with no need for a P&L. Most companies on Crowdcube come into this small company bracket.

Who checks this information is correct? Simple answer is no one. It works on the deterrent model in that directors know fines are applicable if they get it wrong but they also know that the chances of being found out are very very small.

The errors are not always, or indeed maybe rarely, due to fraud. The forms for example for AR01and SH01 are not straight forward if you are not used to dealing with them. The facts are that a large number of filings are incorrect and people are now using these to make investment decisions.

By way of example, a firm that raised capital on Bank to the Future, which we have featured here, has just filed its Annual Return. Datemy Ltd's AR01 shows a number of new shareholders with a large number of new issued shares. So there must have been a filing of the SH01 for new share allotments? No - nothing. This SH01 filing is a legal requirement under the Companies Act 2006. As far as we can tell the issued share capital is still all owned by the founder and amounts to £1000.So what exactly do these new shareholders own? Do they really exist? Certainly two of the names on the list are employees of Bank to the Future, so they are real people. Who knows.

There are plenty more cases. Clearly CH are struggling with staffing levels and are simply not covering these filings; hoping the deterrent will work. Accountancy blog sites confirm this view - its a mess. It didnt really matter before the Crowd were invited to invest in penny shares - something heavily backed by the Government. CH need to up their game and come up with a new system that works for small businesses and crowd investors.

Thursday, 13 August 2015

The recent case of Mara Seaweed is a good example of how not to try to raise money by crowdfunding.

To start with, as we have already pointed out, the total of £500k that they are raising is not the total they are raising on Crowdcube; as they had already had £300k of it pledged - off the platform. So the current pitch's claim that they have raised nearly 80% of their total is at best misleading. Trust is an important friend when crowdfunding.

More worryingly the debacle of the Dragon's Den has shown very clearly that this business has no one on board with any clue about numbers. The CEO lost the plot and made some gaffs about turnover and gross profit - understandable under pressure. What is not understandable is her willingness to compound this error with a far more alarming one. She stated very clearly that the company expects to be making a net profit margin of between 30 and 40% when it has a turnover of £8m. This, she claimed, was based on research her advisers had done into Dorset Cereals - a niche food brand that was sold for £60m to ABF.

We checked Dorset Cereals accounts back to 2003 and in no year did the NP ever exceed 20% and in all but one year it was between 10 and 15% - so under half the figure Mara are projecting. GP and NP are critical figures for a business - they control the cash and cash is essential if you want to remain solvent.

Mara's CEO claimed that serious advisers had given her this figure.

Of course it is entirely possible that her advisers had read a report in the Telegraph that stated Dorset Cereals had made a profit of £16m on a turnover of £36m in 2012. This would have given them a NP margin of 44%. However it does help to be able to read accounts and then you would realise that this figure included a one off payment of £14m for the sale of an intangible asset ie the Brand Name. The real NP was £2m on a £36m t/o or 5.5%.

So do you think Mara have built their whole business on a massive mistake??

We could have told them all this had they asked - the crowd is now very reluctant to back them with only £67k of the £200k raised and time running out. We have little doubt that the business has potential and that the current management's inability to accept their own shortcomings is going to ruin that. It's a crying shame.

There can be no doubt that Mara's founder is not up to the job - even given nerves and a brittle style, she was clearly wading way out of her depth in the shallows of P Jones' gentle questioning. Mara's product has legs but its management have none and it takes both to create a successful business.

I do believe that her failed pitch could become a classic in future MBA presentation seminars - it is often easier to learn from seeing things done badly than vice versa and this was truly bad. Not knowing some very easy basic business facts is one thing but when in a hole do stop digging. Mentioning Dorset Cereals (like everyone on Crowdcube does) and then flannelling the name of the person there she spoke to was unforgivable.

A value of £100k for the business today might be on the light side but it has to closer to the mark than her ludicrous valuation. Will the Crowd be fooled??

We wrote about some odd reviews on the Trust Pilot site for Just Park a while back. They had hundreds of 5 Star reviews all dated in the same very tight time frame and then mostly poor reviews over a more 'natural' period.

Flavourly have consistently been poorly reviewed on TP - until just now. A group of reviews all within a 3 hour slot are all first reviews for the presenters and all very brief but 5 Star. Most of the other reviews are 1 or 2 star.

Flavourly use the internet to misdirect. They pitched on Crowdcube promoting their large subscription base as a key success indicator - failing to point out that it was mainly made up of Groupon customers - oneoffers looking for free deals. The reaction to the product and service was poor. We looked at their pitch at the time, pointing out that they had come up way short of the predictions they used when they pitched previously on Angels Den.

Be aware - the best advice is to ignore the good reviews and read the bad ones - if they are truly awful then avoid.

If you browse through the latest pitch on Crowdcube you would be forgiven for thinking this was a great opportunity. It maybe but not when they choose to hide facts and totally mislead - backed as usual by the Crowdcube platform.

Zero Carbon Foods raised almost £600k at the end of 2013 on Crowdcube, valuing the company then at ~£2m. They have a star studded board - celebrity chefs and CEO's of major movers in their market - salads. It all looked good - expected to have a turnover heading for 4 figures this last financial year and a small net profit.

Now they pitch using a completely different name ''Growing Underground'' - in the hope that the crowd will be too stupid to realise this is Zero CF? They eulogize about the success of the role out and the massive things to come and emphasise their celebrity board. Again it all looks very promising - ticking lots of boxes for the 21C - sustainable food production, limited carbon footprint, limited use of chemicals etc.

So why has the last 12 months seen such a dismal performance? Why did the management not raise the other £400k it said in would in 2014? Why are they looking at a loss of several hundred thousand pounds when they promised a profit and finally why, when all of this is documented fact, do they pretend that its all gone to plan?? Turnover for 2014 was disappointing - the clue is the name. All the money is gone and they will certainly have to raise more cash in the next two years if the last 12 months is anything to go by - despite the usual claims by the management. The new valuation of £2.5m is just more Crowdcube nonsense - based on sales and progress this company has to be worth less than its previous £2m.

We all know that setting up a new business has ups and downs. Delays are inevitable and set backs are guaranteed. So just be honest and say so. Your plans are way off schedule and you need more cash. You have learnt from your mistakes and will act accordingly. Now the opportunity is still alive, with more backing.Stop growing your board and start selling some greens!

Sunday, 9 August 2015

In the past few months quite a number of pitches on Crowdcube have been forced to revalue their offer. Why, well because the crowd told them to and in the end they would have left empty handed if they had not. Some have been forced to offer another 20% of their equity to raise the funds.

So dont just give in to the usual clap trap you hear when you question a valuation - you know like its difficult to value a start up but so and so and such and such recently sold for £x million and we consider ourselves to be similar. Leave them to stew in their own stupidity and they will eventually be forced to react or leave with nothing.

This trend is partly a consequence of Crowdcube pushing companies to promote high valuations and partly the Crowd realising it can derail a pitch if it chooses. It will only increase as more and more new pitches pitch with more and more ridiculous valuations.

Watch out all you entrepreneurs if you come to an ECF platform with a high valuation and no room to lower it - like Mara Seaweed currently. They pretended to be raising £500k on their Crowdcube pitch but in fact £300k had already been raised beforehand.

Now the Crowd are telling them the valuation is way too high but as 300k has already gone in at that rate, it may not be possible for them to adjust. Had they been a little more honest and pitched for £200k then they could have renegotiated the deal more easily. So with half the pitch time passed, they appear to be doing well at £365k raised of £500k - but this is in reality only £65k raised of £200k.......... a ratio that at the halfway mark more often than not leads to failure.

For a company offering legal advice to large corporations to miss both its AR and annual accounts is not very convincing. Previous companies that have funded on Crowdcube and followed this route have all closed. We'll keep you posted as to whether Newgalexy Services are the latest dross on top of the pile of Crowdcube's closed successes.

Thursday, 6 August 2015

If we told you that a company on Crowdcube had funded successfully back in 2013 and its projections showed 2014 net profits of £1.128m, what would you expect the actual accounts to show? Have a guess - would a loss of £20k be the first figure you thought of?

Probably not. Angel Alerts certainly takes some beating when it comes to ridiculous projections. The evidence is pretty well conclusive now, take a Crowdcube projection, halve the bottom line and then divide by 4. Then take the costs and times them by 10. Then you just might have a picture of where the business will be in two years time.

Wednesday, 5 August 2015

Recent discussions have thrown some new light on ECF. Hope that some platforms at least had taken a far more responsible line than the tricked up, gimmicky take used by Crowdcube.

Sadly it didnt take long for this view to evaporate. Syndicate Room claims to be the true way for ECF. Their model takes businesses that already have a lead investor who is funding a minimum of 25% of the pitch - a lead investor who has a track record of investing with returns ie a professional. All good so far. The site still plays with the crowd by using terms like 'dragons' but not in the overt way that other sites do.

So with these lead investors and a minimum investment of £1,000, you would expect a high degree of professionalism. Wouldnt you?

Reading through the current crop of pitches this expectation is shattered. Two of the pitches have in effect the same lead investors and have raised money on the platform through them before. This fact was left out of one of the pitches until it was corrected by a punter on the forum. Not a great start as it was an investment of £700k!

Anglo Scientific (AS) are the lead in these (Innvotec manages the fund and they are in fact the same operation) and a few others that have been on SR. When you read the pitches on SR they ALL talk about exits in the 3 to 5 year frame - they are cautious enough to add caveats to this about unpredictable markets etc but it is the 3-5 year frame not the 10 or 20 year that they choose. So you would expect to see some evidence that AS have achieved at least something in the 5 year frame to back this up.

AS started in 2003 - so in 12 years what have they achieved in terms of ROI? They have invested in 12 businesses, two have closed, two are limping (by their own admission) and 8 are trundling long. No exits .................what? Yes that's the crunch; in 12 years they have achieved zero exits from 12 businesses professionally selected, vetted and fully funded to the tune of £55m. Yet on this ECF platform they talk of 5 year exits at multiple ROIs.

AS may well achieve success but wouldnt it be more honest to show these figures to the crowd before asking them to hand over their money? It just puts Syndicate Room firmly in the same shady place that Crowdcube inhabit.

You can understand why they do it - who would be interested in a 10 or 15 year investment as a punt? That's no fun. So this is where the professional VCs and business angels meet the punters and the gap between their expectations is very very wide. The Syndicate Room model has tried to hide this gap and to be fair it has succeeded so far. It wont last.

Tuesday, 4 August 2015

Is this a problem? An increasing number of pitches on the Crowdcube platform are looking certain to miss their target only to suddenly have a very last minute, large, single investment which takes them over the line. The latest case being Big Sofa.

There is no way to tell if this is a genuine investment or a member of the company filling the void to ensure all the other money comes in. In the case of Big Sofa, the company was on its last day when a single investor put in £240k of the £700k pitched for, which took them just over their target.

Linked to this is another development which is new. Pitches are finding that resistance to their optimistic valuations are forcing them to eventually re offer with a better percentage. So beware those companies that pitch with a fixed off platform deal already in place - eg Mara Seaweed. It is good that these businesses are seeing sense but wouldnt it be better if they came to the Crowd with a sensible offer in the first place. It just puts their business acumen in the spotlight.

Monday, 3 August 2015

As part of our new advice service, here are some pointers on how to be successful when raising money from the Crowd.

1. Have either proof of concept or some serious sales data and real market research ready or be prepared to sell a large percentage of your business. Despite what the platforms tell you, this is a very high risk investment and you need to offer comparable returns. You are offering a chance not a certainty, so dont value your company on the 'fact' that your 3 year sales projections show EBITAD and multiply this by the sector's standard. The value is todays with an uplift for future prospects.

2. Be honest - do not start comparing your start up niche food business with Dorset Cereals or your low tech subscription model with Graze etc. It just makes you look silly and will caste doubt on the credibility of your plans. Generic statements about your market size, copied from a Mintel report, are worthless. Get some real customer feedback.

3. Essential to get a large group of supporters before you launch. All the data shows that the first few weeks of a campaign are crucial. Research shows if you can get over the 33% funded mark early on, the momentum will more often than not, see you over the line. Use SM to generate a buzz. Get the pitch out there big time. Offer evening talks/meet the founders in easily accessed places. Create a highly convincing presentation. Remember investors have a week to withdraw their investment at the end of the time period, so make sure they know this. If you have over funded and with withdrawls accounted for, you are still over your original sum, then you can complete.

4.Use your greatest asset, your customers, to invest that vital first third by offering them generous product discounts or freebies. Like rewards based CF, you can use the pitch to 'sell' product to promote your business.

5. Dont be fooled by the platforms into playing games with the Crowd - they know about these now. If you are raising a total of £500k and £300k has already been arranged outside of the platform (cf Mara Seaweed currently), DO NOT make it look like you are raising £500k on the platform and hey presto you're off to flying start with a £300k funder. It may well prevent what was a perfectly investible plan being unsuccessful.

6. Do have a good deal of skin in the game. The Crowd hates founders who ask them to risk money when they themselves are not. Bank loans etc do not count - you must have equity in your own business. If you are not confident enough why would anyone else be.

7. Be sensible with your valuation and financials. Platforms have seen both escalating out of control since 2011. If your sales jump from £100k to £800k in 12 months you need to show how this will happen. Have you enough cash to make it happen, what is your stock turn like, how will your systems cope with this increase etc etc. Similarly if you show your GPM increasing substantially be sure you can show why - bland statements about economies of scale will not work . Dont use your business plan to enthuse about your multi billion pound market. Use it to show how you will get from A to B and then C in real terms and what you have prepared should you be delayed. Most start ups over trade and run out of cash. Dont be one of them.